Updated: Mar 7, 2022
A home equity loan lets you borrow some of the equity you’ve built up in your home. For most people home equity loans are a convenient, affordable way to access extra cash, but they’re not without risk. Here are four things to consider before applying for a home equity loan
Your loan rate and payments can rise over time. A home equity line of credit (HELOC) is a variable rate loan. As interest rates rise, so will your loan rate and monthly payments (of course, interest rates can also fall, so your loan rate and monthly payments would drop). If this uncertainty is a concern, consider a second mortgage or cash-out refinance instead. The rates on those loans can be locked in, so you always know what your payments will be.
Missing payments puts your home at risk. Since your house is the collateral for a home equity loan, if you default on the loan, you could lose your house. Make sure you have the necessary financial ability and discipline before considering a home equity loan.
Your home’s equity can drop over time. As we’ve seen, major recessions can cause home values to fall. If you take out a home equity loan then the value of your home drops dramatically, you could owe more than your home is worth. Be cautious. Don’t borrow more than you need (don’t borrow at all if you won’t be in the home long enough to outlast a decline in its value) and pay it back as soon as possible.
Making minimum loan payments means you may never pay it off. Many home equity loan payments are interest-only. Making minimum payments means you never reduce the principal. Remember, a home equity loan is a temporary solution to a temporary need. Make interest AND principal payments, so it’s paid off promptly.
If you would like to explore strategic, responsible ways to use the equity in your home, please feel free to call me at 416-427-4391.